NC & VA Warranty Co. v. Fid. Bank (In re NC & VA Warranty Co.)

• Decision Date: 29 June 2016
• Docket Number: CASE NO.15–80016,ADV. PROC. NO. A–15–9032
• Citation: 554 B.R. 110
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re: NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage, Debtor. NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage, Plaintiff, v. The Fidelity Bank, Defendant.

554 B.R. 110

In re: NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage, Debtor.NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage, Plaintiff

v.The Fidelity Bank, Defendant.

CASE NO.15–80016

ADV. PROC. NO. A–15–9032

United States Bankruptcy Court, M.D. North Carolina, Durham Division.

Signed June 29, 2016

J. Alexander S. Barrett, Hagan Barrett & Langley PLLC, Greensboro, NC, for Plaintiff.

Holmes Harden, Holmes P. Harden, Williams Mullen, Raleigh, NC, Michael S. Kolman, D. Wesley Newhouse, Newhouse, Prophater, Kolman & Hogan LLC, Columbus, OH, for Defendant.

MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART MOTION TO AMEND

BENJAMIN A. KAHN

, UNITED STATES BANKRUPTCY JUDGE

This adversary proceeding came before the Court on April 21, 2016, on the Amended Motion to Amend Complaint [Doc. # 63] (the “Amended Motion to Amend”) filed by NC & VA Warranty Company, Inc. (the “Plaintiff” or “NCVA”) on February 26, 2016.¹ Sara Conti appeared as plaintiff and chapter 7 trustee (the “Trustee” or “Plaintiff”). Appearing for the Plaintiff was J. Alexander S. Barrett. Appearing on behalf of Dealers Assurance Company (“Dealers Assurance”) was John Paul Cournoyer. Appearing telephonically on behalf of The Fidelity Bank were Holmes Harden and Wesley Newhouse. The Amended Motion to Amend seeks leave to amend the Complaint to assert claims against Dealers Assurance pursuant to Rule 15 Fed.R.Civ.P

., made applicable to this adversary proceeding by Bankruptcy Rule 7015.² The Court, after reviewing all documents of record and the arguments of counsel during the hearing, has determined that the Amended Motion to Amend will be GRANTED IN PART with respect to the claim for breach of contract. The Amended Motion to Amend will be DENIED IN PART as futile with respect to the remaining proposed claims. The Court further will schedule a pre-trial conference to consider scheduling of matters going forward in this adversary proceeding.

FACTS

NCVA is a corporation organized and existing under the laws of the State of North Carolina. Complaint, Doc. # 1, ¶ 2. NCVA was in the business of providing vehicle service contracts and warranty programs for motor vehicles (known overall as the “Vehicle Service Program”). Id. at ¶ 6. This Vehicle Service Program was sold to consumers through automobile dealers with the purpose of providing the customer with protection against loss in the event of mechanical breakdown of their vehicle. Id. NCVA was responsible for paying claims directly to the customers. Id. at ¶ 7. NCVA contracted with Dealers Assurance, a corporation organized under the laws of the State of Ohio, to act as a re-insurer of NCVA's obligations to customers in the event that NCVA was unable to fulfill its responsibilities. Id. at ¶ 8.

The business relationship between the parties is primarily evidenced by two agreements. On August 9, 2001, NCVA and Dealers Assurance entered into the Insurance Agreement, a copy of which is attached to the Amended Motion to Amend as Exhibit 1. Under the Insurance Agreement, NCVA acted as “Program Administrator” and was responsible for promoting, marketing, installing, maintaining, and administering all aspects of the Vehicle Services Program, collecting and remitting premiums to Dealers Assurance, and facilitating the issuance of certificates and policies of insurance. Insurance Agreement, Doc. # 63–2, ¶ 1. Dealers Assurance acted as the “Program Insurer.” NCVA was the named insured under Dealers Assurance's policy of insurance. Id. at ¶ 2. The Insurance Agreement provided that NCVA would pay Dealers Assurance a premium each month based on the number of service contracts issued, plus any applicable taxes. Id. at ¶ 5. NCVA agreed to maintain a trust account into which it would deposit premiums, reserves, and an administrative deposit to pay customer claims and to indemnify Dealers Assurance in the event that it paid any warranty claims. See Insurance Agreement, ¶¶ 6(b), 7; Trust Agreement, Section 3.

On November 15, 2005, NCVA, Dealers Assurance, and U.S. Bank entered into the Trust Agreement,³ a copy of which is attached to the Amended Motion to Amend as Exhibit 2. Under the Trust Agreement, U.S. Bank agreed to act as trustee for the trust account required by the Insurance Agreement. The funds placed in the Trust Account could not be withdrawn for any purpose other than to pay claims of customers or to indemnify Dealers Assurance for any claims paid directly by Dealers Assurance. Amended Complaint, ¶ 14; Insurance Agreement, ¶¶ 6(a) and 7; Trust Agreement, Section 3. NCVA complied with its obligations under the Insurance Agreement and made all required deposits into the Trust Account. Amended Complaint, ¶ 12.

Section 1(a) of the Trust Agreement provides:

The Grantor [NCVA] shall establish the Trust Account and the Trustee [U.S. Bank] shall administer the Trust Account in its name as Trustee for the sole use and benefit of the Beneficiary [Dealers Assurance]. The Trust Account shall be subject to withdrawal by the Beneficiary [Dealers Assurance] solely as provided herein. The Trust Account shall be maintained at all times separate and distinct from all other assets of the Trustee [U.S. Bank] or any other person or entity at an office or branch of the Trustee [U.S. Bank] in the United States.

Trust Agreement, Section 1(a). The Trust Agreement enumerated the exclusive purposes for which Dealers Assurance had the authority to withdraw and apply assets. See Trust Agreement, Sections 2 and 3. If the Trust Account were terminated, U.S. Bank was authorized and required to distribute to NCVA any assets remaining in the Trust Account after satisfaction of outstanding obligations owed to Dealers Assurance under the Insurance Agreement and Dealers Assurance giving U.S. Bank written authority to disburse. See Trust Agreement, Section 10. In addition to being entitled to any excess remaining corpus of the trust, any interest, dividends, and other income earned on the trust assets could be deposited by the U.S. Bank in a separate account for the benefit of NCVA so long as the trust account maintained a balance of at least of 102% of the required reserves under the agreement. Id., Section 5. These separately posted amounts could be disbursed to NCVA upon NCVA's request and the consent of Dealers Assurance, which could not be unreasonably withheld. Id. Between December 15, 2005, and September 1, 2006, NCVA made deposits of cash and Treasury Bills into the Trust Account in the amount of at least $4,493,490.00 (the “Trust Funds”). Amended Complaint, ¶ 18.

Beginning in approximately December 2005, Dealers Assurance and U.S. Bank transferred the Trust Funds from the Trust Account at U.S. Bank to an account at Interactive Brokers in the name of Marbury Advisors, which account was owned and controlled by Tray Thomas, the son of the sole shareholder of NCVA, Ronnie Thomas. Amended Complaint, ¶ 19. Dealers Assurance and U.S. Bank made these transfers at the request and direction of Tray Thomas. Amended Complaint, ¶ 19. Rhonda Holland, an employee of Dealers Assurance, acting upon the direction and instruction of Robin Ratchford, the then President of Dealers Assurance, gave permission on behalf of Dealers Assurance to U.S. Bank to transfer NCVA's Trust Funds from U.S. Bank to an account at Interactive Brokers not under U.S. Bank's control, but under the control of Tray Thomas. Amended Complaint, ¶ 20. Such transfers ultimately totaled approximately $4 million. Amended Complaint, ¶ 20. By May, 2009, Kirk Borchardt, CEO of Dealers Assurance, knew that the Trust Funds were not with U.S. Bank and had been transferred to Interactive Brokers in an account in the name of Marbury Advisors, controlled by Tray Thomas. Amended Complaint, ¶ 21. At no time did Dealers Assurance take any steps to recover the Trust Funds or to notify Ronnie Thomas or NCVA that the Trust Funds were no longer in the control of the Trustee, U.S. Bank. Amended Complaint, ¶ 22.

U.S. Bank received purported statements of account directly from Tray Thomas rather than from Interactive Brokers, erroneously showing that the Trust Funds were still in the account at Interactive Brokers. Amended Complaint, ¶ 24. U.S. Bank did not verify the accuracy of these statements, id., but nevertheless represented to NCVA that the funds were still on deposit at U.S. Bank, knowing that the Trust Funds had in fact been transferred to Interactive Brokers. Amended Complaint, ¶ 24. U.S. Bank also provided confirmations to the auditors of Dealers Assurance that it had actual custody and control of the Trust Funds. Amended Complaint, ¶ 27. In October or November of 2009, U.S. Bank resigned as Trustee without giving NCVA a reason or disclosing that the Trust Funds were no longer in their control. Amended Complaint, ¶ 29. On November 30, 2009, Fidelity Bank became the new Trustee pursuant to a new trust agreement. Amended Complaint, ¶¶ 29 and 33.

NCVA filed bankruptcy under chapter 7 on January 7, 2015, and Sara A. Conti was appointed as the chapter 7 trustee for NCVA's estate. Dealers Assurance filed a proof of claim on April 29, 2015, asserting a claim of $4,000,000.00 based on the loss of the Trust Funds. See Case No. 15–80016, Claim No. 7.

Prior to filing for bankruptcy, on December 20, 2013,⁴ NCVA brought an action against Tray Thomas, among others, in the United States District Court for the Middle District of North Carolina (the “District Court Complaint”).⁵

In the District Court Complaint, the Debtor made the following allegations: “Starting on or about 2002 and continuing through to 2012, Defendant [Tray] Thomas obtained funds from [NCVA] and other individuals and entities by representing that he could invest those same funds for a higher return on investment.” District Court Complaint, ¶ 10. “Beginning on or about 2002 to December of 2012, Defendant [Tray] Thomas obtained access to the funds placed in trust for the benefit of Dealers Assurance and...